The domestic reverse charge (referred to as the reverse charge) is a substantial change to the way VAT is collected in the building and construction industry.
What is the reverse charge?
The regulation comes in on 1 October 2019 and from then the customer receiving the service pays the VAT due to HMRC instead of paying the supplier under a “reverse charge” arrangement. The customer will account for VAT as if that business had made the supply and if appropriate, recover the same VAT as input tax. It will only apply to individuals or businesses registered for VAT in the UK (although it will not apply to consumers).
How to prepare for the new reverse charge legislation
According to the Government website this will affect your business if you provide specified services listed under the Construction Industry Scheme. The Government recommends businesses prepare for this new legislation by:
- checking whether the reverse charge affects either your sales, purchases or both
- contacting your regular clients or suppliers to let them know
- making sure your accounting systems and software are updated to deal with the reverse charge
- considering whether the change will have an impact on your cashflow
‘The new legislation only applies to supplies which otherwise would be liable to pay VAT at the standard or reduced rate. It doesn’t apply to zero-rated supplies or supplies made by someone that isn’t registered or doesn’t have to be registered for VAT. For example if the supplier is below the VAT registration limit they won’t be affected. The ‘construction services’ that the CSDRC applies to will be the same services that the Income Tax Construction Industry Scheme (CIS) applies to. It is not just construction companies that will be affected but certain electrical and plumbing work, site clearance and businesses repairing or alterating buildings.’
‘We work with clients involved in building and construction in London, Hertfordshire and Bedfordshire. Many of these clients are concerned about the introduction of CSDRC and how it will work with MTD rules. It is important that anyone affected by this legislation is using software compliant with the reverse charge and MTD. Contractors need to also remember that they will have to confirm the correct VAT rate to be used in relation to the reverse charge. There are many issues still unresolved by HMRC that we hope will become clearer during the summer. For example, it is still unclear how companies should respond if construction works were supplied or contracted for before 1st October 2019 but paid afterwards. Similarly guidance is required if a customer becomes an end user during a contract. If you think your business will be affected by the CSDRC or you have questions on how your business interacts with MTD call our Visionary Accountants team in St Albans on 01727 730550. Our accountants use software that is compliant with CSDRC and MTD. We offer your business a free initial consultation so you can plan appropriately for the reverse charge for building and construction services on 1st October.’